»Hamish McRae: Why world is watching for signs our great wage experiment is working

Hamish McRae: Why world is watching for signs our great wage experiment is working

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Britain is starting a huge economic experiment and we may this week have the first sniff as to how it might turn out. On Wednesday, we get figures on unemployment, employment and pay up to the end of March. These are the normal monthly numbers but they take on special significance because they will be the first ones to be published since the Living Wage started to be rolled out a week ago.

The figures only run up to the end of March and look at the previous three months, so there is no direct link. The full minimum wage provisions do not come in for another four years. But you would expect to start to see some effect ahead of the introduction, and there is anecdotal evidence that employers have been planning for several months on how to adapt to having to hand more to their lowest-paid workers.

These include revising shift patterns to use labour more efficiently, cutting hours (and in particular overtime), paring back non-pay benefits.

I would also expect a further push towards self-employment. However, it is unlikely in most cases that all the additional cost can be absorbed, so you would expect some employers to increase their prices and some to accept lower margins. But they cannot accept lower margins forever so the more likely effects will be somewhat lower employment and somewhat higher prices.

There is a further problem for anyone trying to figure out the impact of the Living Wage. It is that there is something else going on: the Brexit debate.

That has pulled back the pound by somewhere between 5% and 10%, which has the effect of slightly increasing the profitability of exports and slightly squeezing importers. It is also postponing decisions. So it is possible that if there is a slowdown in hiring, which I rather expect, this is a Brexit effect, not a Living Wage one. But we simply can’t know.

Whenever some new radical economic policy is brought in (and this goes for Brexit as much as the Living Wage), the government in question, and perhaps the central bank, try to figure out its likely effect. We’ve seen it today with the Treasury’s prognosis on Brexit.

But things rarely turn out as expected. For example, when the Bank of England brought in quantitative easing, it expected the policy eventually to increase inflation. But that does not seem to have happened, or rather there has been a surge in asset inflation in things like house prices but very little effect on consumer prices.

Similarly, when the coalition government started its policy of paring back the fiscal deficit, some economists thought this would lead to double-digit unemployment rates. It didn’t, or at least not much. Despite policy gradually being tightened over the past six years, employment has boomed. Pay, however, has stagnated and productivity has been flat.

There are many reasons behind the disappointing productivity figures but they are the flip side of the success in getting people into work. We suck in labour (mostly from the European Union) to fill the jobs instead of using the labour we’ve got more effectively.

We are not unique in having a productivity problem. Similar concerns are evident in the US and Germany, both of which, like us, have decent growth in employment, and also low unemployment. But we are unique in our policy response. In the US, the minimum wage is roughly half ours, relative to median earnings. In Germany, they are only bringing in a minimum wage now. It is a huge experiment, carried out real time over the whole economy, and other countries are watching to see what happens.

In the real economy, as opposed to the financial markets, things take a while to shift, and in any case other factors are at work. So do not expect radical change. But if there is any hint on Wednesday of employment growth easing or unemployment starting to climb, we should be concerned. On the other hand, if pay rates are starting to nudge up, that at least is what is supposed to be happening. But it may be because we are reaching full capacity in more segments of the labour market, rather than the result of some early effect of the Living Wage.